Crucial factors that can help avoid trading losses

Last Updated: Wed, Oct 24, 2012 06:03 hrs

Managing margins, market lots, position size leverage and brokerage are more important than any contract-selection process for a trader. Every time an intra-day position is taken, hoping to exploit a small price move, those numbers have to be at the finger tips.

Most stock and index futures require 15-20 per cent of the contract value on margin. So, a one per cent swing in the underlying will gain or lose about five-six per cent of the margin. A short-option position requires the same margin as an index futures. Currency futures leverage is close to 1,000:1 - a one paisa swing in an USDINR or EURINR contract will gain or lose Rs 10.

Most experienced day-traders use the market lot to keep a running score. If the market lot is 1,000 shares and there's a gain or loss of a rupee, you get a credit or debit of Rs 1,000, less brokerage and securities transaction taxes. Before entering a trade, it is possible to make a quick, dirty stop-loss calculation on that basis. The more disciplined will examine the volatility of the given contract, and calculate the minimum likely loss in case of an adverse swing.

Somebody trading a stock futures with a large market lot of say, 4,000 shares, could be badly exposed, or stand to gain a large amount. A move of a couple of rupees could come within a few minutes if a trend develops suddenly. If positions are carried overnight, and the contract moves adversely in the last half-hour of trading (after the derivatives segment has closed) or it opens trending in the wrong direction, the trader might be badly wrong-footed.

Brokerage adds another element of cost. There's no point in entering a currency contract unless you're expecting a swing of considerably more than 10 paisa - you will pay that much in entry-exit brokerage combined. Similarly, option brokerage is around Rs 1/unit - that is Rs 50 per Nifty market lot on the entry and ditto on the exit or settlement.

Many traders lose money because they pay insufficient attention to these factors before they take a trade. Another factor to be considered is, how much do you keep in reserve for averaging, or pyramid trades? This depends on your style. Do you average or pyramid at all?

A third factor is, how many contracts can you track simultaneously? If you get a phone call at the wrong instant as a stop loss is triggered, or you simply have too many positions out, you could end up losing a large sum through inattention.

There are no hard-and-fast answers to these questions but any trader must consider these and have his own answers. The most successful trading systems focus on these issues far more than on trade-selection and that's not accidental.

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